Real Estate Syndication and Taxes
Many real estate investors look for ways to passively generate income. That is to say that they don’t want to be bogged down by the daily maintenance issues that arise with owning a property. Additionally, in fix-and-flip models, they don’t want to be obligated to find a real estate agent, go through the listing process and deal with the hassle of selling a home. However, real estate syndications provide more benefits than having the option to passively increase your net-worth. There are also several tax breaks associated with real estate syndications which means that you can keep more of the profits that your money helps to generate.
The term “depreciation” isn’t generally considered a good thing, but when you’re looking for tax breaks on a property, it actually provides a huge benefit. Under the Federal Tax Code, you are allowed to deduct that cost of business items that are thought to have a shelf life, including a building that you have invested in. Some experienced investors consider depreciation to be the most powerful tax break that they have available to them. Once you know the value of a building, you can start determining the depreciation. The IRS says that the lifespan of a commercial building is 39 years, while residential properties have an expected lifespan of 27.5 years. Simply divide the value of the property by the expected lifespan to determine your depreciation total.
If an asset that you have invested in is sold and you receive a portion of the profits, you are required to report those profits to the IRS. However, capital gains taxes operate at a different tax rate than traditional income. There is a difference in short-term and long-term assets when filing taxes, as well. When a property has been held for more than one year before being sold, it is considered a long-term asset. The main thing to remember is that the IRS taxes capital gains at a rate ranging somewhere
between 0% and 20% compared to traditional income, which is taxed between 10% and 37%.
If your goal is to add multiple properties to your investment portfolio, refinancing is a wonderful tool. When a property is refinanced, the borrower borrows money against the increased equity and appreciation of the subject property. The most beneficial aspect of refinancing is that the money you receive is not taxable since it is not considered income. For instance, if you are invested in a property worth $1 million, refinancing it may generate as much as $500,000. That $500,000 can be used to purchase additional properties and is not taxed.
If you’ve ever purchased a home that you didn’t pay cash for, you’re already aware that the largest portion of your earliest payments go towards the interest associated with the loan. These interest payments can be deducted when you file your taxes. These deductions add up quickly, especially in the first few years after the syndication purchases a subject property.
Carried Over Losses
There is a chance that all of these deductions may show up as a loss on paper. Fortunately, these losses can be used to offset other capital gains that you may have received through the syndication or through other investments. However, you can also use these losses to cancel out active income that you may have generated through a job or another active method.
Knowing how to use the tax codes set forth by the IRS to your benefit can put you in a position to benefit even more from the revenue generated through a real estate syndication. Obviously, you will only be able to use a percentage of these deductions, which will be based on your investment. If you invest a larger percentage, you will have access to a larger portion of the deductions. Being able to use the tax laws to your benefit can help ensure that you are increasing your own net-worth and building a lasting financial legacy that can benefit your family for generations.